Strategy Letter #1: How to Grow Fast

Tom Hanks played a little boy in the movie ‘Big’ who simply wished to be big and woke up the next morning bigger than he had imagined. Of course, that was only a movie and no matter what the storybooks say, you can’t grow big overnight whether it’s you personally or your business… or can you?

Recently, I found a post by a blogger that I regularly read named Rob Walling. I mention his site every once in a while, and this post caught my eye. To summarize in case you’re too lazy to follow the link (and I know that some of you are), Rob purchased forum software from someone about a year or so ago and hadn’t had any time to devote to enhancing it. While it was drawing money and web site traffic, it wasn’t something that he wanted to continue to support or invest any further time into. Thus, he had decided to sell it to the highest bidder.

Now, I’ve seen things like this happen before. Eric Sink sold his ‘Winnable Solitaire’ program that he wrote in his spare time as an experiment. I believe that his total gain was perhaps $1,500, which isn’t much, but it’s more than nothing. Another software package called ‘BrilliantPhoto’ was sold directly on eBay. Actually, it was put on eBay probably to draw attention, and then was sold in a closed doors session shortly thereafter.

In both of these cases, the complete source code and rights to everything were (probably) sold. I say probably because those were the initial terms offered, and I rather doubt that once they were offered, they would have been retracted. So, Rob was selling ChitChat.net outright to the highest bidder. Now, I gave this some thought before I even emailed Rob about it. My first thought was, is this even a viable product?

It seemed like it was. Rob had apparently been selling it for nearly a year with almost no promotion and making reasonably decent money from it. The fact that no enhancements have been done in a year and people are still purchasing it meant that it was filling a certain need. The question was, which need is that? So, I delved into it a bit. It turns out that there are only a handful of forum software suites written in C#.NET for sale that fall in the sub $500 price range, include the source code, use SQL Server as the back end, and run only on Windows. In-ter-est-ing…

Now some of you are probably thinking, “Mike, you’re an idiot. You’ll never make your money back and you’re just wasting your time. There’s a ton of free alternatives out there. Why would someone buy that from you?” Isn’t Linux free too? And they have a stranglehold monopoly on the OS market, right? They don’t? Hmm. Let’s stay on this train for just a bit longer then, shall we?

I decided about a month ago where I wanted to take Moon River this year, and it certainly didn’t include buying forum software to enhance my product line. But it wasn’t too far off either. In fact, it fit eerily well into my plans. It could compliment my existing product and serve as an integrated piece of some of my other upcoming products. When most companies sell out, they sell for millions of dollars, if not tens of millions. When you create a startup company and you’re looking for venture capital investors, you have to set a valuation on your company that often seems absolutely absurd. How in the hell could a piece of software that barely works, isn’t out of beta and has no customers be worth anything? Ever use Google? I have no idea what their initial valuation was, but their first investor gave Sergi Brin and Larry Page a check for $100,000 just to get them started.

The value of a company, especially a startup, isn’t just the value of the current product and the few thousand lines of source code that it consists of. The value of a company is based on the implementation of an idea and the value of all the future work that the employees will do. – (Paraphrased from Paul Graham)

So, did this product have value? It certainly seemed to. There was a viable market for it, with competition in lots of different areas. Sales were coming in, so it was definitely a product that could be moved. The lack of effort put forth in selling or enhancing the software seemed as if it were the primary downside to the software. But what about the code? Was it decent? Was it a spaghetti mess that I’d take one look at and never touch again?

I did the only thing I could do. I asked Rob if I could see a copy of the source code. I figured he was selling source code licenses, so it wasn’t a particularly big stretch to ask to see a copy before I made an offer on it. Time was of the essence though, since he had said he would only accept offers for a few weeks, and would accept the first offer over $5,500 immediately.

Rob apparently saw the value in allowing me to see the source code. To be blunt about it, I certainly would not have made an offer had he not. I wasn’t going to spend $99 to get a source code license just to see that it wasn’t worth my time. I received the source code with a request to delete it if I were not the winning bidder, which I readily agreed to.

After looking over the code for a couple of hours, I was actually more impressed with it than I had been by merely looking at the database layout. You see, I’m a bit of a database buff, and just looking at the database design for a product can generally tell you how well things are put together under the hood. There weren’t any foreign keys between the tables which worried me a bit. But after looking at the code, I could tell that the original author took a lot of care in putting things together in a manner that made it easy to follow.

I had the code built, compiled and running on my machine in less than half an hour, and that included a lot of fussing with the solution file because of the revision control stuff buried in it. All in all, it seemed pretty good. A week or so later, I received word from Rob that he was accepting final bids until Friday and he would make a decision over the weekend. I made my bid, waited a few days, and was informed that my takeover bid had been successful. Less than six months in business and Moon River Software had its first acquisition. It includes nothing more than technology transfers and domain names. No employees to take care of, no health plans or 401k plans to transition, nothing complicated like that at all.

So what really led to this decision, and was it really a good idea? I suppose that only time will tell for sure whether or not it was a good idea. Personally I think it was a great idea. My marketing consultant asked me some rather pointed questions, acknowledging that he had some concerns about how well it fit into the future of Moon River and the goals that he and I discussed. I can share with what led up to this decision though.

1. The right technologies.

Moon River Software is doing a lot of work with C#.net right now. We acknowledge that could change in the future, but that’s where we are right now and that’s where we’re going to be for the foreseeable future. It also happens to be the direction which we’re moving deeper and deeper into. Were this software written in PHP, python, lisp, perl, or even VB.net, I don’t think this would have happened. The overhead to convert the underlying technology would have been too much to bear.

SQL Server is currently our database of choice. While I’ve never seen hard facts to support this, my inclination is that people who like php, mySQL, LAMP, LIMP, <insert some other acronym of technologies here> have chosen those technologies in part due to the fact that they’re free. I like free stuff too, but I can’t feed my family if people don’t buy my software. I feel that we’re better off choosing a back end database that lends credence to people who like to pay for software.

2. The right timeframe

Were this deal to come along 2 months ago, I simply wouldn’t have been able to afford it. Only in the past 2 months have things picked up enough for Moon River to be able to afford to purchase the rights to the software. Starting off as a consulting shop has definitely helped give our income a jump start, but as a consulting shop, the actual cash doesn’t come for several weeks after the billing statements go out. In some cases, not for nearly 45 days. Some consultants wait even longer than that to see their checks.

Even if I had the money two months ago, it still would have been a difficult decision because Milestones development was in full swing. Had I lifted my head, version 1.0.1 would not have gone out the door on New Years Eve.

3. The right price

According to Rob, the software had income levels of around $2,300 for the last 12 months. When most companies do acquisitions, they are done for anywhere from 8-20 times revenue. It certainly wasn’t worth $16k to me for that software, given what the development time to create it from scratch would have been. Even at $6,000, I rationalized it as me paying about $20/hour for 300 hours worth of work. That’s nearly 2 full months at 40 hours per week. Not a bad deal overall.

4. A complimentary niche market

ChitChat.net fits into a niche market that overlaps that of Moon River Milestones quite nicely. Both are web based pieces of software written in the same language, targeting the same platforms, and using the same databases. It’s hard to sell someone a SQL Server product when they only have Postgres installed. But if they have SQL Server, IIS and Windows to install Moon River Milestones, they can just as easily reuse that software and hardware for ChitChat.net, or vice versa.

5. A competitive product

The fact that ChitChat.net has been consistently selling at a minimal level with virtually no marketing effort lends credibility to it becoming a heavy player in the world of C#, IIS and SQL Server. The fact of the matter is that little time has been devoted to marketing or development. It’s been given very little direction and has essentially floundered, unable to find a clear path towards success in the world of .net forums dominated recently by Community Server and InstantForum.NET. It just needs a vision, which I think I have.

I spent a lot of time thinking about this over the course of more than a week. ChitChat.net is definitely a product I felt was a worthwhile investment for all of the above reasons and more. It immediately triples the number of products we have to sell because the deal included the SPROC builder, which I haven’t even talked about at all, reason being that wasn’t a part of the sale that interested me. And that’s one way to get bigger fast. Buy the product outright. It’s certainly not for everyone, and you need to have the money to do it, but it can be a worthwhile investment if you have all of your ducks in a row. A word of caution though. Don’t do something like this for the sake of expanding. Do it because you have a plan in mind that you want to execute. The previously mentioned ‘Winnable Solitaire’ was sold to an individual who already owned a web site selling a freecell game. For him, it was a great complimentary product. For me, it would have been a waste of money.

For the time being, you’re not going to see much change because most of the real work will be done behind the scenes. It will appear on the Moon River Software web site in the near future, and you’ll see more ties between the clickcess.com web site and the main MRS web site. Right now I’m neck deep in contract work for a client. Moon River Milestones v1.1.0 is nearing completion, and our next product code namedAurora is being written. If you don’t see anything right away, don’t fret. I’ll post more updates as work gets underway.